EN BANC

[G.R. No. L-10195. November 29, 1958.]

BELMAN COMPAIA INCORPORADA, Plaintiff-Appellee, v. CENTRAL BANK OF THE
PHILIPPINES, Defendant-Appellant.
Bienvenido L. Garcia and Eutiquiano Garcia for Appellee.
Nat. M. Balboa and Luis M. Kasilag for Appellant.

SYLLABUS

1. NEGOTIABLE INSTRUMENT; LETTER OF CREDIT, WHEN CONSIDERED CONSUMMATED CONTRACT. An

irrevocable letter of credit granted by a bank, which authorizes a creditor in a foreign country to draw upon
a debtor of another and to negotiate the draft through the agent or correspondent bank or any bank in the
country of the creditor, is consummated contract, when the agent or correspondent bank or any bank in the
country of the creditor pays or delivers to the latter the amount in foreign currency, as authorized by the
bank in the country by the debtor in compliance with the letter of credit granted by it. It is the date of the
payment of the amount in foreign currency to the creditor in his country by the agent or correspondent bank
of the bank in the country of the debtor that turns from executory to executed or consummated contract. It
is not the date of payment by the debtor to the bank in his country of the amount of foreign exchange sold
that makes the contract executed or consummated, because the bank may grant the debtor extension of
time to pay such debt.
2. FOREIGN EXCHANGE; SALE OF FOREIGN EXCHANGE WHEN SUBJECT TO SPECIAL EXCISE TAX. The
date of payment or delivery of the amount in foreign currency to the creditor determines whether such
amount of foreign currency is subject to the tax imposed by the Government of the country where such
letter of credit was granted.

DECISION

PADILLA, J.:

In a complaint filed on 18 March 1955 in the Court of First Instance of Manila the plaintiff, a corporation,
alleges that having been a successful bidder to supply the Republic of the Philippines with 1,000 reams of
onion skin paper, on 21 September 1950 it applied to the Philippine National Bank for a letter of credit in the
sum of $4,300, United States currency, in favor of Getz Bros. & Co., San Francisco, California, U.S.A., to pay
for such reams, and the Philippine National Bank approved and granted the application for the letter of
credit; that the Philippine National Bank, through the Crocker First National Bank, its correspondent in the
United States, paid to the payee the sum of $4,300, United States currency; that on 26 April 1951 when the
plaintiff paid its account to the Philippine National Bank in Manila, the defendant, pursuant to Republic Act
No. 601, as amended, assessed and collected from it 17% special excise tax on the amount in Philippine
peso of foreign exchange sold, amounting to P1,474.70 which the plaintiff paid to the defendant under
protest for the reason that as the letter of credit was approved and granted on 21 September 1950, or
before 28 March 1951, the date of the enactment or approval of Republic Act No. 601, as amended, the
amount of foreign exchange sold by the defendant bank by the letter of credit to the plaintiff corporation
was not subject to such excise tax; that on 28 December 1954 the plaintiff corporation made a demand in
writing upon the defendant bank for the refund of the aforesaid sum; and that notwithstanding repeated
demands the defendant bank refused to make the refund. The plaintiff corporation prays that the 17%
special excise tax assessed and collected from it on the amount in Philippine peso of foreign exchange sold
on 21 September 1950, be declared illegal; and that the defendant bank be ordered to refund to it the sum
of P1,474.70 illegally assessed and collected (civil No. 25708).
On 25 March 1955 the defendant bank moved for the dismissal of the complaint on the ground that

1. The assessment and collection from the plaintiff of the sum of P1,474.70 as 17% special excise tax is in
accordance with law, because it was a tax collected after March 28, 1951, when the 17% special excise tax
law went into effect, when the plaintiff paid to the Philippine National Bank on April 25, 1951 the peso
equivalent of the draft in U. S. dollars accepted by the plaintiff.
2. The transaction in which foreign exchange was sold subject to the 17% excise tax is not one of those
exempted or refundable under Section 2, 3, 4, and 8 of said 17% tax law, Republic Act No. 601.
On 1 April 1955 the plaintiff corporation objected to the motion to dismiss; on 5 April the defendant bank
filed a reply thereto; and on 11 April the plaintiff a "rejoinder to defendants reply." On 19 April the Court
denied the motion to dismiss.
On 28 April 1955 the defendant filed its answer reiterating that although the plaintiff corporation had applied
for and been granted a commercial letter of credit on 21 September 1950, before the effectivity of Republic
Act No. 601, as amended, no sale of foreign exchange took place on that date, because such sale actually
took place on 26 April 1951, when the plaintiff paid to the Philippine National Bank the amount in Philippine
currency of the foreign exchange sold. Hence it was subject to the 17% special excise tax.
After hearing and filing by the parties of their respective memoranda, the Court rendered judgment ordering
the defendant bank to refund to the plaintiff corporation the sum of P1,474.70, with legal interest thereon
from 25 April 1951 until fully paid, and to pay the costs. A motion to set aside the judgment thus rendered
was denied. The defendant has appealed.
Foreign exchange is the conversion of an amount of money or currency of one country into an equivalent
amount of money or currency of another. 1 The appellant claims that the grant or approval on an application
for a letter of credit for an amount payable in foreign currency is only an executory contract, in the sense
that until payment, return, or settlement of the amount paid and delivered by, or collected from, the bank in
foreign currency be made by the debtor, the contract is not executed or consummated. Hence, if on the date
of payment by the debtor to the bank of the amount of foreign exchange sold the law imposing the excise
tax was already in force, such tax must be collected. On the other hand, the appellee contends that, upon
the approval or grant of an application for a letter of credit for an amount payable in foreign currency, the
contract is perfected or consummated. Hence, if on the date of such approval or grant the law imposing the
excise tax was not yet in existence, such tax can not be assessed and collected. Both contentions cannot be
sustained.
An irrevocable letter of credit granted by a bank, which authorizes a creditor in a foreign country to draw
upon a debtor of another and to negotiate the draft through the agent or correspondent bank or any bank in
the country of the creditor, is a consummated contract, when the agent or correspondent bank or any bank
in the country of the creditor pays or delivers to the latter the amount in foreign currency, as authorized by
the bank in the country of the debtor in compliance with the letter of credit granted by it. It is the date of
the payment of the amount in foreign currency to the creditor in his country by the agent or correspondent
bank of the bank in the country of the debtor that turns from executory to executed or consummated
contract. It is not the date of payment by the debtor to the bank in his country of the amount of foreign
exchange sold that makes the contract executed or consummated, because the bank may grant the debtor
extension of time to pay such debt. The contention of the appellee that as there was a meeting of the minds
of the contracting parties as to price and object of the contract 2 upon the approval or grant of an
application for a letter of credit for an amount payable in foreign currency, the contract was a valid and
executed contract of sale of foreign exchange. True, there was such a contract in the sense that one party
who has performed his part may compel the other to perform his. 3 Still until payment be made in foreign
currency of the amount applied for in the letter of credit and approved and granted by the bank, the same is
not an executed or consummated contract. The payment of the amount in foreign currency to the creditor
by the bank or its agent or correspondent is necessary to consummate the contract. Hence the date of such
payment or delivery of the amount in foreign currency to the creditor determines whether such amount of
foreign currency is subject to the tax imposed by the Government of the country where such letter of credit
was granted.
It appearing that the draft authorized by the letter of credit applied for by the appellee and granted by the
appellant must be drawn and presented or negotiated in San Francisco, California, U.S.A., not later than 19
October 1950 (Exhibit H), it may be presumed that the payment of $4,300 in favor of Getz Bros., Inc. in San
Francisco, California, U.S.A., for the account of the appellee was paid by the Crocker First National Bank, as
agent or correspondent of the Philippine National Bank, on or before 19 October 1950. Such being the case,
the excise tax at the rate of 17% on the amount to be paid by the appellant in Philippine currency for the

foreign exchange sold is not subject to such tax, because Republic Act No. 601 imposing such tax took effect
only on 28 March 1951. 4
The judgment appealed from is affirmed, without pronouncement as to costs. 5
Paras, C.J., Bengzon, Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L. and
Endencia, JJ., concur.